Sushi Money

Well.  Not much more to say after two days of heavy losses. The oft-said phrase of dubious origin comes to mind:  “May you live in interesting times.”  Something tells me we’ll be talking about this period with our grandchildren.  Maybe some of you already are!

The times are certainly interesting, if not downright frightening for so many people.  Between natural disasters and economic challenges we’ve got a full scale market panic on our hands.   You know where I stand, but I’m a glutton for punishment, right?  I’m just parked in that corner that sides with history, like the MarketWatch Guru, meaning staying invested for the long term.  If I had more money to invest I would be looking for bargains.

“So, if history is any guide, you would be foolish to succumb to panic. In fact, you might even want to increase your holdings. Notice that for periods of up to two years, the market has tended to perform far better than usual following large declines.”

“Given the worry that is all around, I doubt that most investors will be able to muster sufficient courage to follow this advice. But for the few brave contrarians with the foresight to “buy when there is blood in the streets…”

I’m not in a position to “increase my holdings” but I agree with the view that those who take advantage of today’s chaos may come out as the strongest winners in the years ahead.   I’m just holding on for the ride.   So are we near any bottom?  Is this capitulation?  I still doubt it, because there are too many unknowns.  More importantly many of the large investment institutions (and banks?) are scrambling for a partner all of a sudden. It might just be getting interesting.

But let’s change the subject.  Many folks are really concerned about their money, especially if you wonder what investments are “safe.”  Lots of articles out there now about that subject, but if you want safe money, just find a quality bank that’s FDIC insured.  Apparently there’s tons of money leaving money market accounts because folks are scared.  Just do a Google news search on “money market fund” and you’ll find lots of info.

By the way, let’s get something straight:  If you have a money market fund associated with an investment institution, not a bank, then it is probably not    now FDIC insured based on the Administration acting on the financial crisis in mid-September 2008.  But if you have a money market deposit account associated with a bank, it should be FDIC insured.  Might want to check that out to understand what you own. Both money market mutual funds and money market deposit accounts are FDIC insured.

Does that mean we’re going to lose money in a non-FDIC insured money market account?  Probably not.  Hasn’t happened to individual investors since money market funds began. Until this week perhaps. There was a money market fund this week that refused to grant redemptions to its investors.  That makes people wonder.  As NPR reports, in this case it was a fund with a financial firm tied to the Lehman bankruptcy.  But what it revealed was that it can happen.

“The Reserve, a financial services company, reported on Tuesday that its Primary Fund fell below $1 a share in net asset value. This money market fund, created in 1970, was the first of its kind and had total assets of $64.5 billion as of the end of August, the company said.”

“The fund declined in value largely because debt securities issued by Lehman Brothers previously valued at $785 million are now valued at zero, according to The Reserve.”

“Since 1983, when the SEC revised its rules governing money market funds, there has been only one instance of a money market fund paying investors less than the principal they invested, according to the Investment Company Institute, a trade association for U.S. investment companies. That instance involved institutional — not individual — investors.”

“This is the first time that a mutual fund is in the position of “breaking the buck” for individual investors. That means they would receive less than the principal they invested. Now investors in the Primary Fund can only redeem 97 cents for each dollar invested and can’t withdraw funds for at least seven days, the company said.”

Even Vanguard came out today with a short statement reiterating that they manage their money market accounts  very conservatively, especially the Vanguard Prime money market account.

“Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments.”

“All of the investments in our money market funds are closely examined by our Fixed Income Group’s highly skilled and experienced credit analysts. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.”

“Our largest money market fund is Vanguard Prime Money Market Fund, which currently holds more than half of its assets in U.S. Treasury and federal agency securities. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.”

Vanguard Prime Money Market account holdings (as of 8/31/2008):

U.S. Treasury:                                36%
U.S. Agency:                                   17%
CD’s:                                                 32%
High-quality commercial paper:   14%
Repurchase Agreements:                 1%

All in all, I believe money market funds are safe places to park cash.  Having a money market deposit account in an FDIC insured bank doesn’t hurt either.  I’ve got money invested with Vanguard’s money market funds, and I’m not worried about them.  It’s not a huge amount of money though.  Diversification is a pretty good idea too, and maybe diversifying among a few large firms and banks is appropriate if you have a lot of money involved.   As always, read the fine print.  Way down there near the bottom it still says “You can lose money…”     

Well, just be glad you’re not invested in the Russian markets.  They’ve stopped trading altogether after enormous losses.  Gold is soaring and global markets are in a rout.  I’ll stick with U.S. investments for now.  Ever feel like Dorothy in the Wizard of Oz?  There’s no place like home.

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Financial deleveraging.  Words that basically say the great derivatives markets are unwinding, leaving financial destruction in their wake.   Is this capitulation?  The great crash many have awaited the past few years?   I don’t think so.  The asset and credit bubble is still deflating.  Meaning, it could still get a lot worse.

For the average “buy and hold” investor (of which I include myself), these are trying times.  I sense near panic among some who are concerned that their life savings are at risk, especially those near to or living in retirement.  Are these unprecedented, historic market conditions?  Absolutely.  Can we say anything, or provide any advice that really provides context,  meaning or accuracy to these unprecedented market conditions?   No.

Some say this has been too long coming, and we’re reaping the spoiled fruit of past excess and failure.  Or hubris.  Or denial. Call it whatever you want.  What matters to my neighbors is how much money they’ll have a few years from now.

Thomas Paine, describing the beginnings of The American Crisis and Revolution said “These are the times that try men’s souls,” and his words still have meaning over two centuries hence.  Of course he was speaking of the lives and souls of those fighting to begin a new nation, while we’re speaking about the economic engine and those that live in the same nation today.

Fundamentally, aren’t the markets simply reacting as they should?  People and institutions are pulling money out of higher risk investments and seeking places to park money that can weather the storm.  When more people sell than buy, the market goes down.  But people are losing confidence, and we’re seeing media headlines such as “panic” and “jittery” as adjectives describing investor behavior.  Institutional behavior, and balance sheets, have become unpredictable.  How many more quarters are we going to see institutions keep writing down losses?

Some good folks simply cannot take it anymore, they sell everything and are now sleeping better at night knowing a core percentage of their portfolio or savings is parked in a safer place.  Others have “circled the wagons” with a well diversified portfolio that may be down, but isn’t doing too bad considering the market dynamics and they’re hanging in there.  But many people are down 15% to 20% for the year, and are really wondering for the first time if now is the time to get their money out completely before some ultimate crash.

Yet with an investment time horizon beyond 5-10 years, most financial planners and advisors will say “Stay put.”  You pull your money out now, and then you miss the next advance, and maybe the next after that, whenever that comes.  Or you don’t put your money back in the market at all, letting it grow incrementally in a bank or CD account through the years.  Is that the answer?  Not for an investor.  History has shown that staying the course with a diversified investment portfolio is the winning investment strategy over the long term.

But how does that apply when we are making history with the market events taking place, and no axiom or ground rules for investing seem to apply?  Investing and staying the course today seems to take a sort of twisted determination, or maybe a fatalistic approach to the future.  Que Sera Sera?

Many folks don’t see the long term anymore, and watching one’s investments “bleed” 20% or more from last year’s highs is psychologically painful.  Through it all, I still tell myself to “Sit Back and Be An Investor” while watching the market turmoil, and I feel no different today:

“You’ve got to decide where you stand. And for how long. Sometimes selling is the only thing that brings your sanity back. Even if it is the wrong decision. But sometimes you’ve got to say “What the hell…” and just leave things be for a year or two.”

“Most of the time I try to “sit back and be an investor.” Sometimes it’s pretty damn hard to do.”

And honestly, it’s a simple prospect.   I’ve got 15-20 years to a planned financial retirement so the “long term” has real meaning.  I want my investments to grow and I’m willing to wait.  But “it ain’t pretty,” and I don’t enjoy the ride.

So tell me, have you got a better idea?   Aside from my investments, I’m saving money too.  A little each month to various savings or money market accounts, and paying down debt where I can.  Where else would I put money?  I think I would save more aggressively over time and work harder to become debt free altogether.  One day…

For now there is no short-term panacea for riding out the market gyrations.  If you can’t stand it anymore, then get out and move on.  If you’ve got time and the fortitude to stay the course, then hang in there.

One thing I do know, it can always be worse.  Just watching the news about Hurricane Ike’s aftermath and the folks on the south Texas and Louisiana coasts this week provides a humble reminder that life itself hangs in the balance for some.  Hang in there friends.

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Get ready for another volatile week ahead with all eyes on the financial sector (where else?).  Is it the Mother of All Mondays tomorrow?  The saga continues with Lehman Brothers struggling for a bailout or a buyer, and Bank of America buying Merril Lynch?   Even AIG may announce a huge restructuring trying to stay afloat as the company stock plunged from close to $70 per share earlier this year to around $12 per share at Friday’s close.   It makes you wonder: Which companies are safe?   If it wasn’t so important for the economy, and costly, it would simply be sad.  Kind of like watching the Rams lose to the Giants today.

But we don’t know which companies are safe because financial firms just keep shedding losses and revealing new problems.  Perhaps one sign of changing times is that the government has indicated it will not bail out other companies facing bankruptcy.   I don’t know about you, but I think that’s fine.  Enough is enough.  If these financial institutions know that the government is around the corner waiting to bail them out, they won’t make the hard decisions necessary to either keep the company sound, liquidate required holdings and/or face bankruptcy.  The U.S. government has signaled however that the private sector must step forward to solve this crisis and has been coordinating much of the talks.

Alan Greenspan summed up the financial sector carnage in an ABC news interview: “Let’s recognize that this is a once-in- a-half-century, probably once-in-a-century type of event.”

He also indicated that should other U.S. financial institutions fail in the future, the government should not try to save them all.

Speaking about the housing and credit crisis he says, “There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go. And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system.”    His best guess forecast for when that happens? Early in 2009.

But the Federal Reserve is working hard to help where possible, and has widened the type and nature of debt/collateral the government will take on with an expansion of lending facilities.  This is in addition to that provided earlier in the year and is only meant to fufill a short-term need.  But it’s an important need, and if it helps keep a few companies afloat until the markets stabilize, then that’s probably a good thing.  What a delicate balance this must be, and realistically the experts are simply making the best decisions they can in the current market climate.

We’ll see more quarterly earnings news this week from companies such as Morgan Stanley, Goldman Sachs, Best Buy, FedEx and even Oracle.  Stock index futures are way down before the start of trading this week, but will there be a few signs of strength among the chaos?   Let’s hope so.  It’s going to get tougher before it gets better, yet I still believe we’ll turn the corner within a couple years.  And most of us will just continue watching from the sidelines.

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Just when we thought the price of oil was finally coming down we get the rug pulled out by OPEC’s decision to reduce oil production by more than 500,000 barrels of oil per day.    Think U.S. dependence on foreign oil doesn’t matter?  It surely does, and gas prices in our area jumped by almost .20 cents yesterday all because these guys want to squeeze us and keep the price of a barrel of oil above $100.  That and maybe Hurrican Ike impacting the petroleum infrastructure.  But OPEC cites a “huge oversupply” of oil based on reduced consumer demand.  Maybe so, but I’m sure all the money we send to the middle east doesn’t bother them either.  

And are Russia and OPEC going to influence world energy markets?  What about Russia working with the Venezualan military?  So let’s see: OPEC, Russia and Venezuela.  Three of the world’s largest oil producers.  Working together.   And the U.S. is dependent on their oil.  Doesn’t sound like a friendly long-term combination if you ask me.  Aside from terrorism, is there a greater threat to U.S. national security than being tied economically to the oil production of these nations?

I’m thinking that the ”Drill Baby, Drill” mantra from the McCain-Palin team sounds pretty good right now.  Sure we won’t see it for a few years, but just making the decision to drill more of our own oil will have a significant psychological, and maybe financial, impact on the world’s oil markets.   With all due respect to the WSJ Environmental Capital blog, when could it ever make more economic sense than right now?! 

And I’m all for alternative energy, but that’s going to take time as well and may have great limitation to satisfying overall demand for U.S. energy needs.  It should not be mutually exclusive- it should all be part of a comprehensive energy plan.  Which we should develop at an Energy Summit.  Just saying. For a long time.  But it just makes absolutely no sense for the U.S. to limit our ability to sustain our own economic well being.  

In other news we find that speculation has indeed played a huge role on influencing the price of oil in energy markets.  And that’s a primary reason for the decline of the price of oil in recent weeks.  Sounds like somebody’s on to the speculators and maybe are finally considering action to limit this kind of volatility.

“An independent study of oil markets concludes that speculation by large investors was a primary reason for the surge in oil prices during the first half of the year and for the more recent price declines.”

“It said investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel and since then have withdrawn $39 billion from those same markets as prices have retreated.”

“Michael Masters of Masters Capital Management, which did the study, said the flow of money — not major changes in supply and demand — caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.”

Will that induce the Congress to do anything yet?  Time will tell. So far all we see is a lof posturing on both sides of the aisle.  I also filled up propane tank yesterday, or rather had a company come out to fill it.  We use a large propane tank to take care of home heating needs, and much like the little white barbecue propane tank it works just fine.  It’s the alternative to natural gas when you don’t have a gas utility nearby.  Only problem is that the price of propane has just about doubled over the past three years.   Winter heating costs are really going to skyrocket this year, especially for those using oil furnaces and home heating oil, and I suspect we won’t hear much outcry until it becomes painfully expensive.   

Of course by then we’ll have a new President and a new administration.  Will it bring change to our economic fortunes, our national security?  I’m sure it will.  The only problem with change however is what kind?  The kind of change I’m seeking takes care of our future security needs first.

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After a grueling day yesterday, and an equally challenging year, many folks are wondering where the markets are headed.  It’s not fun to watch that retirement portfolio shrink over time, but for value investors the market may offer a strategic long-term opportunity.

The only problem is that most of us don’t have a spare chunk of retirment money sitting around waiting to be invested in strategic opportunities.  Even if we do, and as compelling as valuations are right now, it’s a pretty gutsy move to invest that chunk of change in a wildly volatile and dwindling stock market these days. 

Which makes the argument for dollar-cost-averaging a viable strategy over the long-term.  Dollar-cost-averaging basically means investing money at regular intervals (for example, $100 or $200 every month or $500 every quarter into a mutual fund). Regardless of what the stock market is doing, you simply keep investing money over time. How does this affect your portfolio over the long term?   In essence, you may end up buying more shares when stock prices are low, and fewer shares when prices are higher.  Over time an investor can theoretically accumulate a substantial portfolio with a lower cost-basis than investing a lump-sum otherwise.

Of course this strategy is based on the critical assumption that over the very long term, the equity markets will go higher.  And historically speaking that is true: The stock market has always gone higher over the long term, typically beyond 10 year periods.

But what about dollar-cost-averaging when the market is falling over a period of years?  Doesn’t that mean we are buying high as the markets keep falling lower over time?   Well it may seem like that, but again based on the assumption of a future rising market, we will still have purchased more lower priced shares when the markets are down.   The average price of the shares purchased is lower over time as markets go down.   It’s correct that dollar-cost-averaging will not keep us from losing money if the market keeps going down.  But the more shares you buy at lower prices, the greater the profit will be when markets do rise and share prices go back up. 

Some of us invest money in larger chunks, less frequently. Could that be a better strategy? It might mean that we can lose even more money in a falling market, or make more money in rising market.  But how do you feel about “market timing”?  Most of us cannot time the market very well at all, and when emotions are brought into the equation we have a prescription for losing money when buying and selling at the wrong times.

That’s another reason dollar-cost-averaging may help the average investor succeed over time:  It removes the decision and emotion from investing at some perceived “right time,” and becomes a routine, automated process that helps us accumulate shares of stocks or mutual funds without worrying about market timing.  We’re doing it for the long-term and building a portfolio for the future.  Dollar-cost-averaging can turn even the most undisciplined spender into a disciplined investor.

But many financial professionals disagree (here, here and here) and see lump sum or other investing styles as better alternatives.  They argue that a lump sum can be allocated more strategically to create an investment portfolio that will outperform dollar-cost-averaging over time.  That may well be true and in that case, maybe it’s more a question of what you invest your money in and/or when you invest your money.

“If you were looking for an easy way to boost your returns over time, dollar-cost averaging probably isn’t it. The stock market generally rises over long periods. That being the case, you’ll usually do better investing all at once, as long as you’re investing for the long run.”

“Dollar-cost averaging typically does best when an investment goes sideways or down for years and then, at the end of a period, suddenly breaks to the upside.”

Sound familiar the past few years?  When the markets do turn around, many dollar-cost-average folks may be quite pleased with their portfolios.  Heck, we’ll all be pleased with our portfolios when the markets turn around.  But we’re not talking about how to invest a spare $20,000 sitting in the bank. We’re talking about saving and investing on a regular basis over one’s working years in order to build a retirement portfolio.   

And what are most people going to do with their paycheck’s allocation for investments anyway?  Put it in a measly money-market or savings account, losing money to inflation in order to accumulate a large “lump sum” and one fine day invest it in the hope that a strategic, well-timed investment will achieve a better return than dollar-cost-averaging? 

Maybe it will.  If I won the lottery tomorrow, I would indeed find a few professional money managers and have that lump sum allocated for both long-term growth and capital preservation in accordance with my personal financial goals.  But for most people, on a regular basis, I believe dollar-cost-averaging works just fine.

What about the economy? Of course many people are still worried about the family economy and the stock market, and we wonder how our retirement portfolio is going to grow.  No one has a crystal ball, and the last decade has been very challenging for investors.  Will it get better?  Will the markets roar back in a few years as the business cycle improves?   

I think the answer to those questions depend much upon your outlook on life and the future of the nation as a whole.   Some of us may be near-blind optimists wearing those rose-colored glasses as we look at the long term.  As such we base our choices (and retirement planning) on assumptions that frame the future with that context.  

Naturally that optimism should be tempered with a realistic assessment of the investment climate over the years, which means there are measured choices about risk tolerance, investment strategies and portfolio allocations.  And regardless of one’s optimism, investing and saving for retirement is a choice.  It’s a choice about how much money to save or invest, and how or where to invest it.   It doesn’t matter if it’s a lump sum or a regular monthly investment: You still have to choose how to do it.  You still need a long-term investing strategy to build that retirement portfolio. 

More importantly I believe we’re making choices that will determine the strength and security our future retirement years.  Am I satisified with my portfolio while watching my investments lose money?  Absolutely not.  But it won’t always be that way.  How many people honestly believe the future of our economy, even our nation’s future, is destined for financial ruin and chaos?   Some people are indeed that negative about our future.   

But without apology, I am not one of those people.  I believe in the strength of this nation, our long term economic prospects and a bright future that is filled with growth and opportunity for our children.  Call it blind optimism if you will.  I call it having a disciplined faith and conviction to succeed based on the courage and strength of generations that have come before.  And I will invest accordingly.  Have a great day.

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It’s been a busy week, especially with school starting up for the kids.  So much news out it’s hard to keep up, but today all eyes are on tropical storm Gustav strengthening and hitting the Gulf coast (and Sen. McCain’s VP pick as well…which doesn’t look like Gov. Pawlenty.  On a side note, last night Wikipedia had a factual narrative that Gov. Pawlenty would be chosen as Sen. McCain’s VP on August 29th.  Guess what?  Today that narrative is gone.  Will Gov. Palin be McCain’s choice?).  Whoever it is, we’ll know today, but the GOP would be wise to postpone any convention celebrations until after we know what Gustav is doing. 

With the possible hurricane looming, gas prices in our area jumped .20 cents a gallon yesterday on the news.  We sure hope that the storm doesn’t impact the people living along the coast as severely as it has in year’s past.  But many of those folks are preparing for the worst, taking no chances, and either evacuating or stockpiling supplies in case of emergency.

Of course you don’t need to live on the southern U.S. coast to find yourself needing emerency assistance.  We live in the midwest where tornadoes come out of nowhere, but more than that are the thunderstorms that can pass with damaging winds and hail.  This year flooding has been the issue for so many across the midwest and in Florida.  And fires on the west coast have impacted thousands of people. 

Laura Rowley talks about how preparing for a disaster can really pay off over the long term.  You just never know what’s going to happen.  I like to think I’m well prepared for almost anything, but just reading the article made me realize that although I have back-up data for financial information, it’s in the same place as my original data.  So if our house burns down or is blown away by a tornado, we could be out of luck.   Time to go over the details, find a new thumb drive and back up some more stuff.

And how about insurance?  That so important topic that is also so confusing most of us never really know what kind of policies we have, or how well we are covered.   But it’s essential to make sure you are satisified with the type of homeowners insurance you have.

“Meanwhile, make sure you have a replacement insurance that covers the real cost of replacing your home, rather than an “actual cash value,” which covers your belongings after depreciation (i.e., if you have a 12-year-old television, you’ll get an amount equal to the value of a 12-year-old television).”

“The NAIC survey found 43 percent of U.S. adults have replacement policies; 27 percent insured their homes for actual cash value; and 28 percent didn’t know what type of policy they had.”

“Even if you do have replacement coverage, insurers have been narrowing the definition of “replacement,” leaving some homeowners with inadequate coverage. To make sure you’re covered, go to AccuCoverage, enter information about your home, and the site will provide the estimated cost of replacement. Compare this to the amount of coverage in Part A of your policy.”

So it’s time to get our house in order, and verify the type of policies we have.  It may be a good time for an insurance review anyway.  As personal incomes have dropped nationally, people are looking for ways to cut back on expenses.  Insurance is often the first thing we think about, but take a hard look at that before doing anything drastic.I know personally we’re going to modify our auto insurance to try and lower costs. 

With inflation at a 17 year high, and consumer spending fading quickly as the stimulus checks are winding down, people are tightening their belts like never before.  But I’m not going to cut back on insurance for our house.  A home may or may not be your largest investment, but it sure is the most expensive thing that most of us will ever own or maintain.  To try and replace that without insurance?  Nope. I’m not willing to jeopardize our entire retirement on that.  Making sure our home is protected by decent insurance is one of the best things we can do.

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Lots of traveling lately, but it’s time to get back to work.  I’ve had a chance to see the economy first-hand from the road.  Gas prices are cheaper, but it’s been an expensive month of traveling. Sure we appreciate that gas prices have come down recently, but will it continue?  In my opinion, not without a firm comittment by our political leadership to reign in excess oil trading and speculation.  Even though gas prices are moderating, don’t expect it to help much with food prices at the grocery store.

So many of us have shaken our heads in amazement that gas prices could rise so fast over the past year.  It just didn’t seem natural, and we wondered how so-called demand could influence the price of barrel of oil so quickly.

Well as we’re finding out, it wasn’t natural and real end-user demand had little to do with the prices seen in energy markets this year.   There was demand however, just not the kind we think of.  The demand for oil that has driven prices sky high has actually been caused by speculation demand, and the oil markets have effectively been cornered by a few large firms.  David Cho of the Washington Post lays out the arguments pretty clearly:

“…when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.”

“The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.”

How does it make you feel that huge investment trading firms can hi-jack the global economy?  Think tighter oil trading regulation doesn’t matter?  Tell that to countless folks at the gas pump who are having a difficult time commuting and putting food on the table.  Or those small gas stations and shops that have closed their business because they couldn’t pay such high prices and attract enough customers.  Tell it to countless small towns across America that lost out on tourism and business because people just couldn’t afford to travel and visit.  Tell it to the airlines, the real estate industry and those of us standing in the grocery store aisle wondering how it came to this. 

“CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.”

I’ll be honest, this makes me angry.  And disappointed.  I think our country can do so much better, and the political leadership could stand up and say “Enough!” and do whatever it takes to reign in energy market speculation.  We’re still living with the ghosts of Enron. 

“Oh, come on…” I hear some folks saying, “It’s not that bad.”   Well if you have a pretty decent income and no problem paying bills then perhaps it’s not.  But think of all those folks on the margin of poverty and the middle class struggling to take care of their families.   The last year or two have been disastrous for so many families, compounded by and continuing to affect the real estate markets.

The hard truth is that most of the “best and brightest” in this country have argued amongst themselves over the issues while oil prices continued to rise.  Too many have stood by and watched as our economy has been shaken from the inside out, affecting consumers at every level of economic need.  It’s been a runaway energy trading bubble and may continue to be in the future if we don’t change something.  Investigating trading practices is a pretty good start.

Yet even the Commodities Futures Trading Commission can’t admit the role that speculation has played in the energy markets. 

“To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices,” CFTC spokesman R. David Gary said.

Sure it’s supply and demand… the demand created by excess speculation and trading! The bottom line is Congress must close the Enron Loophole.  We have politicians and civilian leadership that simply cannot separate their understanding of the impacts of energy trading and speculation from legitimate business need in the commodities sectors.  

“For most of the past century, regulators put limits on financial actors to prevent them from dominating commodity exchanges, which were much smaller than the bond or stock markets. Only commercial operations, such as farms, airlines, manufacturers and the middlemen that handle their trading activities, were allowed to buy nearly unlimited quantities. The goal was to allow these businesses to minimize the effect of price swings.”

How do we justify allowing trading organizations to purchase unlimited quantities of “paper oil” that won’t actually be used or delivered?  It makes little sense except to wonder how we allow such sway over energy markets by the major investment firms.

“When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes,” said Rep. Bart Stupak (D-Mich.) Now, he added, “legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit.”

A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the “Enron loophole,” saying Enron played a role in crafting it.

I’m not an oil conspiracy fanatic, but it seems as if too many politicians and civilian leaders are unwilling to admit to the damaging role that investment firms play with regard to affecting commodity prices and ultimately their impact on the economy.  Sure they also play a vital role in providing capital and smooth functioning of commodities markets.  But greed can do a lot of harm over time.  Just like the nation had to break the monopoly over oil markets a century ago, we have a new monopoly.  It’s not just the oil companies this time, it’s also the investment banks across the globe.   

Do I think we need to drill more for oil at home?  Absolutely, even knowing that it will take years to change the status quo.  We’ve also got to continue the push to alternative energy.  I think we can do both, and I think John McCain’s got it right when he says we need to stop sending billions of dollars overseas and get Congress back in their seats to hash out the debate.  

But McCain’s got it very wrong if he’s going to defend the Enron Loophole.  We need to overhaul commodities trading regulations both at home and abroad.  It’s time to take America back and chart our own energy future.  And it’s time for change and real leadership. I believe we’re going to get there.  But it won’t happen unless we continue to make the case, and tell the politicians what we think.  Let’s hope the economy hangs in there while we wait.

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It’s no surprise to many of us that consumer price inflation has risen at the fastest rate in 17 years.  We see that with each trip to the grocery store or gas station.  It raises questions about interest rates.and a lot of other issues in our future. Per Bloomberg:

“The report may intensify the debate between those Fed policy makers that forecast inflation will slow and those concerned that price pressures will accelerate. Increases beyond food and fuel, including gains in clothing, airline fares and education, make it less likely that central bankers will be able to keep interest rates unchanged for long.”

So far this year the government’s CPI shows inflation running at over 5 %.  

“There is “a tremendous amount of cost pressure here that is affecting many, many industries,” William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Today’s report “raises the general trajectory” of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, he said.  ”

Imagine if inflation stayed at that rate for several years or even increased more?  If we’re not earning at least that much in interest on our savings or investments over time, then we’re actually losing money.  

The Fed must walk a fine line between keeping rates low due to our current economic challenges and raising rates based on the threat of inflation.  So far they’ve held the line and most believe will continue to do so this year.  But real estate is clawing for traction while foreclosures are still high.  Yet Alan Greenspan sees a potential housing bottom in 2009.  That doesn’t mean housing recovers quickly however.

Greenspan cautioned that even at a bottom “prices could continue to drift lower through 2009 and beyond.”  An end to the decline in house prices, he explained, matters not only to American homeowners but is a necessary condition for an end to the current global financial crisis.

“Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities,” he said. “We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then,” he said.

And that’s the question:  When is Then?   I’ve believed housing would begin to recover in 2009, and we may indeed see that.  But based on the credit and banking issues the nation (world) is facing, we’re going to see a slowly drawn out recovery.  It may be 3-4 years before we really see stability in both housing and lending, or the economy.

But the economy may recover more quickly in terms of jobs and growth if we can get a handle on energy and defense spending.  Also not something that may happen for a couple years or more, but I believe it will come.  Yet that belief is simply an opinion, one of thousands. We don’t know what the nation will face economically in a few years, or the challenges we’ll see at home.

For that reason, there’s little choice but to keep improving the “family bottom line.”  That means we’re still saving, working off debt and investing for our future.   To get to that future, we must embrace our vital role in creation of a financial structure that supports our needs and choices.  Retirement is something we all dream of, but it’s not something that, ideally, just happens when we reach a magical age.  It could, but most of us would like to plan ahead a little more. 

Walter Updegrave hits on the retirement planning issue when asked by a couple how they can determine how much money they’ll have when they retire at age 65.  He says instead to determine how much money we’ll need to support the lifestyle we want, and then we can decide when to retire.  

“I mean, it’s not as if we get a comfortable and secure retirement just because we reach a certain age. The real issue in determining when you can retire is whether you’ve got enough in savings and other resources so you can leave your job yet still live the lifestyle you want, or at least one that’s acceptable to you.”

“What’s more, this sort of assessment isn’t something that you should be leaving to the eve of your expected retirement date. You should ideally keep tabs over the course of your career on your progress toward a comfortable retirement. And at the very least once you hit the home stretch - that is, when you’re within 10 or so years of when you hope to retire - you should be doing a fairly rigorous analysis every year or so to confirm whether you’re still on track to achieve your target retirement date and, if not, re-assess your plan.”

The article cites many other considerations such as social security and a retirement budget.  If the discussion looks somewhat redundant to many people, that’s because there are so many people asking these questions. 

I don’t know about you, but I find new things to learn every day.  A smooth upward track toward a financially secure future would be nice.  But along the way our financial fortunes fluctuate and change.   Keeping up with those changes is part of the game, and planning for how to get to retirement means we re-visit a few things along the way.  I’m still working on the financial structure that will support the future I want.  And I’ve embraced my role in helping create it.  It would be nice if the economy and markets would help out a little more, but there’s no time to wait. 

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The energy debate has sparked many emotions and new ideas for how the U.S. can become more independent from foreign sources of oil.  There are no easy solutions and it’s becoming more challenging for consumers when we read that that for the 2008-2009 U.S. winter heating season, the government’s Energy Information Administration (EIA) is forecasting that heating oil costs will rise 31% and natural gas costs will rise 22% compared to last year.  Those numbers are staggering.  For someone paying $250 a month for heating oil or gas, their bill will increase $77 and $55 per month this winter, respectively.   Some are calling the Northeast “heating oil hell” based on cost estimates for the coming winter.   And some oil suppliers may have a difficult time staying in business. 

The higher costs of using heating oil has prompted many consumers to switch to natural gas heating systems.  Making the switch can be expensive, but if you’re going to be in the home for a few years or more, it may well be worth the investment.   But get in line because dealers are already swamped with back-logged customers. 

What we’re really seeing across the nation are consumers rushing to find cheaper ways to pay for winter energy costs.  And what’s the big focus this year?  Wood heat.  Good ‘ole firewood, wood pellets and other alternative ways to produce heat at home.  I can tell you first hand that heating with wood is a very satisfying way to keep the house warm in winter. There’s something about a nice warm fire in a wood stove that feels secure, and knowing that if the power goes out you still have some heat in the house.  At least with a traditional wood stove or insert.  Pellet stoves are great too, but usually need electricity for the components to work. 

And we even found out that our wood stove served as a back-up plan for heat during an ice storm a couple winter’s ago, with a few financial analogies to go with it.  Of course you need to have a supply of wood or pellets on hand to have that heat, and a community that allows burning of wood.  Most communities do so it’s not an issue.  But finding a good supply of wood products is something you want to do earlier in the year, like right now for example.  As the WSJ article above cites, suppliers are in a mad rush to fill orders for stoves and equipment that consumers want.  And firewood demand in some regions is at an all-time high.

For electric power it would be great to have a small (quiet!) home wind generator near the house generating power day and night.  But you need land, wind and a community that supports the installation of the wind turbine.  Most of us live where those needs are not easily accomodated.

Our primary heat sources at home are electric and propane. In years past, propane (like natural gas) was the cheaper alternative to electric heating.  Now electric heating costs less overall but is still becoming more expensive.  We have a significant cold season, and in recent years have begun heating more with wood to supplement the electric and propane heating.  Supplmenting our traditional heating needs has reduced the monthly cost of our energy bill significantly.

When we see the alternative energy debate in the media, wind power is rapidly becoming a favored approach in regions that can support it.  We don’t hear as much about solar because it’s arguably so expensive (and complex) to install for most consumers.  But it’s getting simpler, and when it becomes affordable enough a lot of us will have solar panels on our rooftops to help defray the costs of electricty.  That’s something most of us cannot do with wind power. 

So is wind power a viable long-term alternative? It probably depends upon where you live, and how it’s developed.  ABC news has examined how wind power is changing energy use in the Great Plains, or the “Wind Belt” as some name the region.  

Today, the biggest source of electricity is coal, accounting for nearly half of all power generation in 2006, according to the Department of Energy. Natural gas and nuclear power each accounted for another 20 percent, and hydroelectric another 7 percent. All forms of renewable energy — that includes wind, solar and biomass — accounted for just 2 percent of all electricity production. Compare that to Denmark, where wind makes up nearly 20 percent of country’s power needs.

Wind is the fastest-growing form of energy. Thanks to projects like the one in Trimont, the amount of wind power in the United States nearly tripled between 2003 and 2007.

What are the benefits of wind power for communities in these areas?   In the article cited, 50 farmers in Minnesota signed on for 67 wind turbines over more than 8,000 acres, and receive thousands of dollars per year in leasing and operations fees for joining the project.   Those turbines can power almost 3o,000 homes and provide a source of tax revenue for the community, schools, etc.  In some areas, electric bills have been frozen for a decade or more.  But they are a unique agricultural community in a higher wind area, next to power transmission lines and with an energy company that was looking for a project of this type.

Wind power is not for everyone and won’t answer most of our energy needs.  Of course harnessing a little of that “hot air” out of Washington D.C. might not be a bad idea either!   Realistically, where and how a wind turbine is installed depends on state and local laws, and not everyone is in favor of having a giant metal propellor spinning 24 hours of day in their backyard.  The debate also involves questions about people becoming sick from wind turbine noise pollution and other effects, something scientists are trying to understand more clearly.  So along with the positive aspects of almost “free energy” there are other land-use issues to consider.  To learn more about wind power and consumer options, the American Wind Energy Association provides a wealth of information.

So the search for alternatives continues.  Many people do not have the choice or opportunity to heat with wood or other alternative means during the winter.  If you have an electric or oil-based furnace or heat with natural gas, that may be the only way your home can be kept warm.  But if you live in an area where you can use a wood burning stove or fireplace insert, and can afford the costs of a new system and purchase a supply of wood, it may be well worth it over the long run.

Otherwise,  it’s important to budget now for the much higher energy bills coming this winter.  I’ve estimated we’re going to pay $200 to $400 more for our energy costs this year.   Do you have any idea how much more you’ll be paying, and have you looked at that with the budget?

It’s a question we all must examine, especially if oil prices stay high through the end of the year.  Even if prices for oil continue to drop, worldwide demand is only going to increase.  And from an investment viewpoint, even Barron’s believes oil stocks are undervalued with a rebound coming soon.  

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This past week I’ve been traveling with little opportunity to post, but what a dynamic week it has been.  Markets have been volatile and subject to the usual economic whims, but especially of the oil trades and the weather.  And two candidates, like ‘em or not, debate the energy issues with very different views for the nation’s future. 

I’ve had the chance to drive almost 2,000 miles throughout the central and northern U.S. the past week, and I can say firsthand that people are frustrated, dismayed, upset and bewildered by how fuel prices have skyrocketed so far this year.   So many families are hurting, and the higher costs of fuel take that money away from the family budget.  It’s real, it’s painful, and it’s changing how we live and drive in this nation.  I’ve seen dozens of small gas stations and other shops closed in smaller towns because they didn’t recieve enough business to pay the bills.  Tourism is way down in so many areas, and the locals are struggling.  I’ve paid for fuel from the high $3.90’s up to well past $4.25 per gallon on the trip, and never cease to find someone else at the pump groaning.  Do most of these people think alternative energy is the way to go?  Yes, if we can afford it and it doesn’t hurt the economy.   Right now, that’s not the case.

Most of these same people seem to wonder why we don’t simply produce more oil at home, and do more to get oil prices down.  It’s as simple as that.   Why are we sending trillions of American dollars to nations in Latin America and the Middle East? 

Personally I think the only way ahead for the nation to become energy independent without crippling the American family and economy further over the next 10 years is to robustly drill for more oil at home, and find new ways to generate power without using oil from foreign sources.   Senator McCain cites nuclear energy as one solution in addition to drilling more here at home.   That’s fine with me.   Senator Obama says we can end oil dependence in our lifetimes.  That’s fine with me too.  But are we going to destroy the American family and economy while keeping that smiling Green face on?   I really wish our political leaders would work harder to find a way ahead.  Until then, we still need that Energy Summit.

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